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Is Philippines ETF Struggling Because of Rodrigo Duterte?

Lately, Philippines stocks and ETFs have been under stress most likely because a few irrational comments and planned initiatives by the country’s president Rodrigo Duterte. He intends to lower the buying of U.S. arms, all for Russian and Chinese missiles and weapons. Also, Rodrigo Duterte warned the U.S. on October 4, 2016 that his countrymay abandon combined military exercises with Washington.

The outburst was provoked by extensive criticism by the U.S. on Duterte’s hostile clampdown on illegal drug trade that took lives of thousands of alleged drug dealers and users. If this was not enough, Duterte compared himself with the Nazi leader Adolf Hitler – infamous for killing millions of Jews – when it comes to killing masses of drug addicts.

As the U.S. expressed concerns over his apparent Hitler-like acts, Duterte noted that he may finally choose to "break up with America." Not only the U.S., Duterte also attacked the European Union for commenting on his severely aggressive move against drug issues.

Investors should note that Rodrigo Duterte came to presidential power on June 30, 2016 and since then seems to be trying to overhaul the country’s foreign policy that has long been in close ties with the U.S. However, Duterte now appears more inclined to rekindle the country’s relationship with China and Russia.

As per Reuters, U.S. officials have so far given little importance to Duterte's outrageous statements, instead emphasized its long-standing coalition with the Philippines for diplomatic interest. This is truer in the light of China's fast rise in recent years in the Asian bloc and its intention to command over the South China Sea. However, as per White House, the U.S. has no formal message from Duterte's government about any change in ties as yet.

Market Impact

Though nothing is official yet, market watchers probably started speculating a disruption in the Philippines–U.S. foreign policy. This could be a reason why iShares MSCI Philippines (EPHE - Free Report) slumped over 6.3% in the last three months (as of October 4, 2016) – just after Rodrigo Duterte took office, while the broader emerging market ETF Vanguard FTSE Emerging Markets ETF (VWO - Free Report) tacked on about 7% gains (read: 3 Top Performing Emerging Market ETFs of Q3).

EPHE lost over 1.4% on October 4, 2016 while VWO retreated 1%. In this context, we would like to note that apart from Duterte’s comments on Tuesday, renewed worries over the Fed rate hike in December also played a role in dragging down emerging market ETFs.

The ETF looks to track the MSCI Philippines Investable Market Index. The fund invests about $249.1 million of assets in 45 securities (see all Asia-Pacific (Emerging) ETFs here).

The financial sector takes the top spot in the fund with about 46% exposure and is closely followed by industrials (22.3%). No other sector gets a double-digit allocation in the fund.

It is worth noting that the fund has considerable concentration risk with about 60% of assets invested in the top 10 holdings. Ayala Land (9.53%), SM Prime Holdings (7.70%) and JG Summit Holdings (7.16%) make up the top three holdings.

The fund charges an expense ratio of 62 basis points. EPHE currently has Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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